Odaily talks to GSR: We only make what we should make

Original - Odaily

Author - Husband How

In the cryptocurrency market, market makers have always been mysterious and curious entities. They are called big dealers and play the role of providing liquidity and maintaining transaction balance. But how exactly do they work? What impact and help do they have on the cryptocurrency market? In order to answer these questions, Odaily had the honor to interview GSR COO Xin Song.

Xin Song was born in Xian and moved to the UK at the age of 4. She graduated from the London School of Economics and the London Business School. After graduation, Xin worked as an investment manager at BlackRock, and later returned to China to start a business. He has experience in Internet finance, decentralized asset management platforms and other projects. He currently serves as COO at GSR.

In this interview, Xin explains to us how market makers operate and what their goals are. The main task of market makers is to provide liquidity services so that market participants can conduct transactions at rational prices while ensuring that transactions have as little impact on market prices as possible. Their goal is to ensure that trading depth is good enough to allow traders to trade at any time and to provide rational trading prices.

In addition, we also discussed GSR’s competitive advantages and future development goals as a market maker. They focus on long-term stable development and trusting relationships with partners, and are committed to providing full life cycle services to institutional customers such as project parties and exchanges. They will increase their layout and investment in the Asia-Pacific market, and focus on research and investment in the Web 3 and DeFi fields.

Through this interview, Odaily hopes to help everyone have a clearer understanding of the role and impact of market makers. As an important part of the cryptocurrency market, market makers have made important contributions to the stability and liquidity of the market. They are not only transaction intermediaries, but also provide important infrastructure and services to the market.

The following is a condensed QA:

Odaily: Market makers are relatively mysterious existences in the eyes of most people in the currency circle. Some people call you Dazhuang. Can you describe in simpler terms how market makers operate and how they help cryptocurrencies? wait.

Xin：Our main mission is to provide liquidity services,That is, allowing market participants to trade the assets they hold at rational prices at any time and time zone. Whether they are retail investors or institutions, they should be able to trade on our platform, and we want to ensure that their trading behavior does not have a great impact on the market price, so as to achieve average transactions and transactions close to the current market price.

I think market makers should do the following three things:

● Make sure the trading depth is good enough.Regardless of whether the trading volume is large or small, traders actions will not have much impact on market prices. This allows traders to trade at more rational prices without worrying about hidden costs.

● The platform is guaranteed to allow customers to trade around the clock.We have access to about 60 exchanges. No matter where our customers are, they can trade on compliant exchanges. At the same time, our programmatic trading strategies will continue to quote prices around the clock, ensuring that customers can trade at any time. Trading.

● Ensure that the price of the transaction is rational.This involves the issue of price differences. If the spread is large, traders will incur additional hidden costs in addition to exchange fees. Therefore, we need to ensure that the spread is small and the depth is good, so that traders can arrive at a more rational price.

To put it another way, we are a bit like drivers on the Didi taxi platform. We are a supplier, providing liquidity services to the market. Just like a driver waits for a passenger, we wait for traders orders and ensure they can find the right counterparty and trade at a cheaper price in a short period of time. This process is similar to trading on the Internet platform, and our income comes from subsidies from exchanges or project parties to provide a good trading experience.

I think what market makers should not do is actively intervene in the market and manipulate prices or trading volumes. We only do what we should do.

Finally, liquidity is very important to the cryptocurrency industry. Unlike the stock market, if cryptocurrencies don’t have enough liquidity, the entire ecosystem can collapse.Therefore, we believe that liquidity is an infrastructure, and we play an important role as part of the infrastructure.

Odaily: The leading market makers on the market include DWF, Wintermute, etc. Compared with these two companies, does GSR have some core competitive advantages or business models other than market making behind its increasing market share?

Xin：I dont think DWF is a direct competitor to us. In terms of values, company culture, target customer groups, trading strategies and behaviors, some customers operate on a different level than us. Their main target customers (but this does not represent all their customers) are projects that are currently hot or have low market value. Some of the methods adopted by DWF, such as creating trading volume and activity, or packaging OTC transactions as investments, send some seemingly positive false signals to the market for these projects, which may attract the attention of some investors, but we Think this approach could be harmful to the industry as a whole.

Our company’s view is,We want to build a healthy ecosystem in the industry. We attach great importance to long-term development and strengthening trust with partners such as exchanges. We have seen many market makers eliminated from the market over the past decade, with only a few surviving. We do not want to engage in non-compliant behavior for the sake of temporary gains. We are more concerned about long-term stability and the sustainable development of the industry.

We hold Wintermute respectfully because we believe they share our values ​​in some way. However, we also have some differences, the core one being trust. Our team is mainly service-oriented, and our positioning is to provide customers with full life-cycle value-added services, and we are willing to support them throughout their development process. Other teams may focus more on proprietary quantitative trading. They care more about short-term profits rather than long-term close cooperative relationships and service quality.

We will continue to make layout and adjustments based on customer needs and market conditions. We are willing to invest in projects at an early stage and provide them with financial services once they mature. Our goal is to establish long-term cooperative relationships with our customers and grow with them.

Odaily: On August 15, The Block stated that GSR was currently reducing its operating scale. Subsequently, GSR responded: GSR is operating well and has successfully survived the past three bear markets without seeking external capital. What are the key factors that have allowed GSR to remain stable and profitable despite market adversity?

Xin：I think internal adjustments and personnel changes within the company are a very normal phenomenon, especially in a rapidly developing field like the encryption industry. Our company also has some turnover of personnel, but we have maintained a relatively stable market share. Our focus on talent and risk control allows us to stay ahead of the curve.

From an overall volume perspective, we probably do have less absolute volume in a bear market. But from a market share perspective, were still in the lead. We adopt a conservative risk control strategy and remain cautious in new business lines. We take risk management very seriously and a relatively conservative strategy has proven to be correct in the past. We avoid some of the problems faced by other competitors in our industry, including high leverage and technological vulnerabilities.

Our companys long-term perspective is also our strength. We always look ahead and focus on steady growth and adjustment. Our stability is reflected in our relatively low turnover rate.We have been profitable every year for the past ten years, which is relatively rare in the crypto industry.

Odaily: The income from market fluctuations is also part of the income of market makers. A recent ARK related report stated that Bitcoin volatility has dropped to historical lows. The volatility of Ethereum has also exceeded 20% in the past few days. The market volatility is so Low, what is the impact on you?

Xin：Changes in volatility do affect our bottom line.As a compliant market maker, we are very neutral. We do not bet on direction, nor do we manipulate prices or market trends. Our profit model is mainly to obtain profits by constantly hedging risks. We can only make money when the market has real trading volume and volatility. Therefore, when we screen customers, we also hope to select only projects that have real application scenarios and active users, and are truly creating value.

Our role is like selling when traders are buying, and buying when traders are selling. We are constantly buying and selling, but we do not actively choose the direction of the market. Therefore, we must rely on real trading volume and volatility to make profits.

Volatility and trading volume are positively correlated, and when volatility is lower, trading volume is generally lower. In this market environment, it becomes more difficult to make money, so we will do some additional services. In this case, it becomes even more important for us to screen our customers, hoping to only cooperate with the best quality project parties. They need projects with real application scenarios, active users, and real value creation to have two-way buying and selling demand. The markets transaction demand cannot always be biased towards selling and lack the support of buying, because we cannot always play the role of a taker. Therefore, real buying and selling demand is very important to us. Although it has a certain impact on our profit model, it is not very large.

In a bear market, we will provide some additional services to supplement the income of the main business. In addition to providing liquidity services, we will also provide structured products and financial products to allow our customers to enhance the rate of return on their inventory assets. In a low-volatility environment, people usually hope to obtain some low-risk returns, such as capital-guaranteed financial products. These options-based products are relatively cheap to buy when volatility is low, and if the market recovers, the gains are magnified by leverage. Therefore, this product is quite popular among high-net-worth customers, miners and project parties, and it has also become another source of income for us.

Odaily: From the perspective of a market maker, what kind of events or indicators do you think are the key turning points for the current market to turn from a bear market to a bull market?

Xin：The market is indeed at a low stage now, and I was also in such a market environment when I first entered this industry. The market was in the doldrums throughout 2018 and 2019. So regarding the market recovery, there will be some factors to pay attention to, mainly including technical aspects and fundamentals.

From a technical perspective, institutional involvement may be an important consideration. After the FTX-related incident, many people were frightened. There was counterparty risk in placing funds on the exchange, and people were worried that the exchange would go bankrupt. But there may be some breakthroughs next year. Some large asset management companies, such as BlackRock, have applied for licenses for ETF products, and results are expected in the first half of next year. In addition to them, there are several other well-known asset management companies that are also actively preparing. The credibility and financial security of these companies are not a problem. Therefore, institutional participation may increase in the first half of next year, which may be beneficial to the market recovery.

Another factor is the halving of Bitcoin. Generally speaking, the halving of Bitcoin will trigger a wave of market prices.

From a fundamental perspective, I am more optimistic about some projects, especially Layer 2 projects, such as Ethereum’s ZK Rollup and Optimistic Rollup. Many such projects will come online in the first half of next year, which will increase transaction throughput and bring new application scenarios, including order book-style decentralized derivatives exchanges and social networks. From a fundamental perspective, these new application scenarios may attract more users.

In general, market bull and bear factors mainly involve technical aspects and fundamentals.On the technical front, institutional participation and Bitcoin’s halving will have an impact on the market. In terms of fundamentals, the launch of some new Layer 2 projects will bring new application scenarios to the market.In addition, macroeconomic factors will also have an impact on the digital currency market, especially the U.S. interest rate hike and cut policies as well as the election and regulatory changes. Taken together, there are some breakthrough points in the first half of next year, which may prompt the market to pick up.

Odaily: What is GSR’s overall strategic plan? Can you reveal some of your future development priorities or goals?

Xin：Before answering this question, let us first review some of the salient features of this cycle compared with the previous cycle:

The first distinguishing feature, in my opinion, isThe development of the entire industry will be more stable, and the trend of refined division of labor will become increasingly obvious., even though we are now in a bear market stage, the entire market still maintains enthusiasm.

In terms of division of labor, GSR, as a global institution, we have seen the rise of star project parties from the Western world on Layer 1 and Layer 2, but the cryptocurrency market has entered a very mature stage, and the development of Layer 1 and Layer 2 Development requires the support of the entire ecosystem, especially the need to attract many developers to participate in the development of the application layer.

The outbreak of the Internet era has brought about the prosperity of the developer ecosystem in the Asian market. A large number of excellent developers have emerged in the Greater China and Southeast Asian markets. ETHcc 2024 has decided to be held in Southeast Asia, which also shows that Ethereum is very optimistic about the development environment in Southeast Asia.

The second distinguishing feature isIn addition to the innate developer resource advantages, the Asian market has an increasingly positive attitude towards cryptocurrency.. Both the Singapore and Hong Kong markets have embraced cryptocurrencies by actively introducing compliance policies.

For its part, the Singaporean government remains steadfast in its embrace of cryptocurrencies, even after the FTX crash. Ravi, director of the Monetary Authority of Singapore, said in his speech last year: Singapore wants to be a center for digital assets, but it does not want to be a center for speculative cryptocurrency. At the same time, the Monetary Authority issued the final regulation of stablecoins on August 15 this year. Framework, which means that Singapore becomes one of the first jurisdictions in the world to incorporate stablecoins into the regulatory system. It can be seen that Singapore’s regulatory focus has begun to shift to the protection of retail investors.

Hong Kong’s policies also show a trend of latecomers catching up. The issuance of the VASP license has led to the emergence of many compliant exchanges. As the largest market maker, GSR is also actively involved in the liquidity services of these exchanges.

Based on these two significant changes we captured, we also realigned our strategy.We will provide more in-depth services to our project parties, exchanges and other institutional customers, expanding from the original currency listing services to services throughout the project life cycle.

In response to the trend of vertical and refined development in the industry, we expanded from the original MM and OTC business lines to Ventures investment. In the past year and a half, we have been very active in the primary market with an investment amount of around 150 m, investing in more than 200 projects and primary market funds to provide financial support for early-stage projects. This year, our investment strategy will also be more inclined to participate in some large-scale ecological early-stage projects to support ecological development. We will also support incubators and accelerators of blockchain technology to help developers connect Layer 1 and Layer 2, and provide legal and marketing services. and other consulting services. Leverage our resource network that has been in the industry for ten years to help developers while building an ecosystem for our Layer 1 and Layer 2 projects.

In terms of compliance, we have conducted reflection and self-iteration. Based on expectations of the US SEC’s proactive regulatory attitude, we believe that the cryptocurrency market will quickly enter the mainstream market. While continuing to expand our business, we have established a strong self-regulatory system. Based on this view, we have received in-principle approval for a Major Payments Institution license from the Monetary Authority of Singapore (MAS) this year. The license represents a milestone in the group’s regulatory journey, enabling GSR to better serve the entire cryptocurrency ecosystem. It can also allow industry participants to more clearly distinguish which are the high-quality, legal and compliant market makers in the industry. GSR is proud to meet the strict entry requirements set by MAS and will continue to work hard to ensure the long-term health of the industry. GSR is ready to continue to take root in the Asia-Pacific region, investing in local entrepreneurs and encouraging users to adopt Web 3.0 technologies. We are also one of the founding members of the Hong Kong Licensed Virtual Assets Association.

In such a macro environment, we need to adjust our overall strategy. Regionally, we hope to see a more balanced global development in the industry; on the business line, we regard DeFi as an important strategic area and continue to work hard on research and investment in spot and derivative DEX.